The sooner the rules are on the books, the sooner we'll know what's working and be able to fix what's not. This camp believes bringing Dodd-Frank to life is an important step toward restoring the public's trust in the banking business.

HSBC Chief Irene Dorner was the most recent CEO to make this case.

"Quite simply, it's all taking too long to implement," Dorner said of financial reform at American Banker's annual regulatory symposium last week. The delay feeds uncertainty and hesitancy, she said, and that is harming economic growth.

Treasury Secretary Jack Lew has made getting Dodd-Frank done a priority. "[T]here is a growing understanding that once the rules are in place, there will be time to see what is working and what is not, and then we can make appropriate adjustments," he said in July.

In June, I wrote a column warning bankers and regulators that the slow-walk could produce a backlash in Congress, which could enact an even harsher law.

I still believe that, but enough smart people have told me I'm wrong that I wanted to present the counter-argument.

First, federal rules, once written, are rarely changed.

"Once you get a rule out, the willingness to revisit it is virtually zero," says one regulation-writer-turned-banker. "Nothing ever gets fixed after the fact."

Second, no rule is better than a lousy one.

"Living with a bad outcome is worse than living with no outcome," is how this source put it.

And finally, even without the formal rules in place, Dodd-Frank's mandates are being applied, especially to the largest banks.

"The real action is what they are doing to us" behind the scenes, "which dwarfs all the rule-writing," another bank executive says.

Getting regulatory approvals on models for capital and liquidity calculations is difficult, he says, and pressure to reduce risk is forcing banks to leave certain businesses and to drop various clients.

"They are putting everyone out of the capital markets business," this banker said.

This idea that regulation is broader than just the rules on the books is an important and easy-to-overlook factor here.

Supervision is comprehensive and cumulative and it comes at institutions from a number of angles.

Let's take capital rules for example.

First there's the actual compliance with various capital rules, including the ones from the Basel Committee. Dodd-Frank layers on the Collins amendment, which sets a floor under capital levels.

Then there are stress tests to ensure the largest banks have enough capital to withstand economic shocks. Then there are several capital surcharges for the biggest banks.

And of course there are individual safety and soundness exams where regulators have authority to require however much capital they think is necessary.

So like most policy questions, there are two sides to this one. Yes, five years on we should have more than 40% of Dodd-Frank implemented. A more complete process would bring clarity to the business and would help convince the public that the government has a grip on the risks posed by financial system.

But it's also true that we need effective rules because do-overs are unlikely. (That's a shame, but also a reality.) And Dodd-Frank has many belts and more than a few suspenders so even without full implementation, regulators have a lot of tools to tame risk-taking.

Bill Isaac, the former FDIC chairman who's now chairman of Fifth Third Bancorp (FITB), was one of the people who disagreed with that column I wrote in June. So I thought I'd give him the last word. Isaac was traveling on Monday, so he weighed in by email.

"What a Hobson's choice!" Isaac wrote.

"Quickly slap together regulations implementing a very bad law that is punitive, ineffective, and worse yet counter-cyclical in order to provide greater certainty about the rules of the road or be more deliberate in order to limit the damage at the cost of increasing uncertainty. I vote for more deliberation in the hope that sanity will prevail before too much more damage is inflicted on the banking system and the economy."

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Comments (6)

I'm a banking software developer for a very small company & our customers are hometown community banks. I must adamantly agree with Isaac to take time & consider consequences of quickly slapping something together. Our software is built around federal & state regulations so we analyze pros & cons to figure out "how" to implement changes before making actual programming changes. It's much easier to enhance something well-written as opposed to completely re-writing it & starting over from scratch because 1 or 2 real-time possibilities were not taken into consideration & not found until after implementation.

Posted by joy2behere | Monday, October 07 2013 at 2:45PM ET

The Rehm v. Isaac debate poses a false dichotomy:

Rehm: Just get the rules done and let us get back to business as usual; and, Isaac: DF is "a very bad law that is punitive, ineffective, and worse yet counter-cyclical" and should be reversed.

Have we lost sight of the third way? That is: 1)There are serious flaws in DF, not the least of which is its failure to cure the TBTF problem; and, 2) there are some very good things in DF such as the regulation of derivatives for the first time.

So, let's all calm down, check our handguns and ideologies at the door, roll up our sleeves, and do the major surgery on DF that's needed for a deeply flawed piece of legislation? Oh, I forgot, Congress doesn't work that way any more.

Cornelius Hurley, Boston University

Posted by hurley | Tuesday, October 01 2013 at 6:00PM ET

That made me smile Bob. Figured I may not be right on this one. I like to think govt officials want to get the policy right and are willing to make changes when necessary but that's not how the real world is working these days.

Posted by brehm | Tuesday, October 01 2013 at 5:58PM ET

It takes a brave and thoughtful person to do op eds on their own columns. Thank you.

Posted by Bob Davis | Tuesday, October 01 2013 at 5:51PM ET

Appreciate you putting out the counterargument on need for fast implementation of Dodd-Frank. I second Bill Isaac's vote for more deliberation before these rules are finalized. It is clear the regulators do not know what the impact of the rules they are writing will be on the industry and even if it will result in a sounder and safer industry. The one thing is clear is that it will be more over burdened industry for those that want to comply (and most banks do) and those that want to game the system will continue to do so. Dodd-Frank never was a solution to the problems we experienced and failed to address the GSEs--a rather large oversight.

Posted by Diane Casey-Landry | Tuesday, October 01 2013 at 5:25PM ET

Dodd Frank is really the same as Obamacare: both based on the false notion that markets failed and politicians and regulators will fix them. In both cases the failure resulted from politicians extracting opaque subsidies from finance. For Obamacare it is the young who arew forced to pay a mandatory tax to finance the uninsured. For Dodd-Frank, it is wealthier mortgage borrowers who are supposed to subsidized those otherwise not qualified. Central planning failed evertywhere else, and both will fail here.

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